Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

Monte dei Paschi di Siena sinks deeper into the mire.

Over the Christmas holidays, when no one was supposed to pay attention, and when the markets were closed, the bailout costs of Monte dei Paschi di Siena, the third largest bank in Italy, and the center of the Italian banking crisis, suddenly jumped by 75% to €8.8 billion ($9.2 billion)!

Just how immense the black hole inside of a bank really is remains unknown until the bank collapses entirely and the pieces are sorted out. No one wants to know, especially not bank regulators. But when banks are teetering, and a bank bailout, or rather a bondholder bailout is being discussed, the aspects of that hole begin to emerge, and the hole keeps getting bigger the longer someone looks at it.

Earlier this year, the ECB’s stress tests of 51 large European banks determined that Monte dei Paschi was the shakiest among them. The ECB gave the bank until the end of 2016 to raise enough capital or contemplate the prospect of being wound down.

Last week, after Monte dei Paschi failed to work out a private-sector rescue deal led by JP Morgan, a taxpayer bailout was moved to the front burner. The bank’s shares and bonds were suspended from trading until the details of the bailout would emerge. This came after two prior capital increases from the private sector in recent years had failed to fill the holes. Each time, gullible investors had gotten crushed.

On Friday, the Italian government decided to shanghai its taxpayers into bailing out the bank’s bondholders with only a small haircut for holders of certain junior bonds. The decree it approved to that effect was based on the assumption that a €5-billion bailout – a “precautionary recapitalization” – would be needed.

A “precautionary recapitalization” is EU lingo for a taxpayer bailout of a bank that is “illiquid” but is still deemed “solvent.” If a bank is no longer “solvent,” it needs to be wound down, under the new EU regulations banning state aid. This would entail much bigger losses for bondholders and possibly some losses for uninsured depositors.

However, a “precautionary recapitalization” would only require that certain junior bondholders take a small first loss before a big capital contribution by the state would bail out the rest, on terms that need to be endorsed by EU state-aid officials in Brussels.

But the tab keeps ballooning.

On Monday, the “second” Christmas holiday in Germany and some other European countries, when markets were closed, and when people weren’t supposed to pay attention, the ECB responded to Monte dei Paschi – which the bank has meanwhile announced after leaks had spread the word – that it would need, not €5 billion but €8.8 billion to fill the hole.

The ECB said that the bank was “solvent” – because no one wants to even contemplate winding down the bank and dealing with the actual black hole. But it warned of the “rapid deterioration” of its liquidity position during the three weeks through December 21, caused by large outflows of deposits – a run on the bank via electronic means, as Italians were trying to haul their savings to higher ground.

Monte dei Paschi is going to deal with the ECB’s reply this way, according to Monte dei Paschi’s statement:

“The bank has quickly started talks with the competent authorities to understand the methodologies underlying the ECB’s calculations and introduce the measures for a precautionary recapitalization….”

Also on Monday, Jens Weidmann, Bundesbank President and ECB Executive Board Member, warned of a hasty taxpayer bailout, as many questions remain unanswered.

“For the measures planned by the Italian government, the bank has to be financially healthy at its core. The money cannot be used to cover losses that are already expected.”

“These [rules on state aid for failing banks] are meant especially to protect taxpayers and put responsibility on investors. State funds are only intended as a last resort, and that is why the bar is set high.”

But bank bondholders are sacred and taxpayers are a dime a dozen, and bailouts by central banks are free since they can just “print” the money, though in the end, it all boils down to the simple fact that no bailout is free, that someone always pays for it, as long as it’s not the sacred bondholders.

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Paschi would become part of the Italian reserve system = balance sheet only, its (absence of) equity position would be irrelevant.

What about Paschi’s non-performing assets? Paschi could still issue bonds that Italian govt would buy, afterward selling them back to Bank of Italy. Round trip this particular transaction as often as necessary to launder Paschi’s bad debts, selling them forward to the ECB as rock-solid Italian bonds. These bonds could have negative carry like ‘other’ Italian bonds.

Problem solved! :)

Right?

mynamett

Dec 27, 2016 at 6:09 pm

Yes, they will print the money and hide the money printing process by some mechanism like the one you just described.

The printing of money taking place around the world seem to be lifting the price of oil. The raising price of oil will accelerate bank default. Bank will be bail out or their real balance sheet will be hiden too.

The depletion of oil is what will collapse the supply chain, not debt,

RE: A “precautionary recapitalization” is EU lingo for a taxpayer bailout of a bank that is “illiquid” but is still deemed “solvent.” If a bank is no longer “solvent,” it needs to be wound down, under the new EU regulations banning state aid.
——
“Newspeak” and “Doublethink” at its finest! Orwell would be proud.

Agent76

Dec 27, 2016 at 1:44 pm

May 21, 2013 Why the whole banking system is a scam – Godfrey Bloom MEP

UK get out as fast as you can EU is just a curupt club with mario drahi at the top.but maybe it’s children are to noughty to hide and bring it down in the end as justice takes to long but does come even if it’s way to late

NotSoSure

Dec 27, 2016 at 4:15 pm

London itself is a center of corruption. In fact someone named it the most corrupt place on earth.

You can move the UK to the ends of the earth, but you can’t escape human nature.

Realist

Dec 27, 2016 at 7:17 pm

The best aspect of a brexit if it really will be fullfilled, is that Europe will in that case get rid of the City of London, the place that is the epicenter for all dirty laundry, among others the Americans do their dirty business there that are too dirty for even the lax US regulations, not to forget the banks of the Brits themselves …

WTFrogg

Dec 27, 2016 at 4:03 pm

Perhaps bankers should be declared as a sub-species earmarked for extinction. I’m sure there would be no shortage of burned and ripped off investors who would help them achieve that status.
Pitchforks, tar and feathers perhaps ???

Chicken

Dec 27, 2016 at 4:32 pm

Cutting through the code words to the chase….

Socialize the losses, privatize the gains. Nice work if you can get it!

George

Dec 27, 2016 at 11:06 pm

Chicken, I love how you get right to it!!

Lay in some ‘vittles’folks. Get a few hens and a pressure canner etc.
When this thing pops it will be one heck of a wingding.

Greatful again

Dec 27, 2016 at 4:58 pm

No wonder the Italian people avoid taxes at all cost. Who would blame them. I guess that goes for all of us now that I think about it.

walter map

Dec 27, 2016 at 5:32 pm

Somebody has to pay for all that corporate welfare. It wouldn’t make sense for corporations to pay taxes and then just get it right back, now would it? What would be the point?

Would it surprise you to know that the banking system really does work exactly as intended? Workers have some money, bankers want it, and hire officials to take it for them. And what, precisely, are workers going to do about that?

After all, the weak are meat and the strong do eat. Lions could save themselves a lot of running around by domesticating the damn antelope, a trick the corporatists learned a long time ago.

Ishkabibble

Dec 28, 2016 at 2:48 pm

Another great comment, walter! You really do get it. The “banking system” is indeed working exactly according to its new-fangled 2009 design.

The silver lining to the increasingly dark economic cloud is that there are only 361 shopping days left until the next celebration of Jesus Christ’s birthdayhttp://www.xmasclock.com/
when we will all once again arise like Stepford Wives to perform our perfectly-programmed function of injecting some more borrowed “money” into “our” TBTF economy.

To lubricate and fuel the system, Janet will give even more of the Fed’s printed-out-of-thin-air fiat dollars to even more TBTF banks so that they will have enough reserves to allow them to create even more fiat dollars to “lend” to customers (at a high “interest” rate, naturally) who must then inject those dollars into the TBTF economy by buying things manufactured by foreign slaves who are slaving away in US-coporate-owned foreign sweat shops.

Janet will also print whatever it takes number of fiat dollars to keep the US’s perpetual wars of world-wide hegemony (and every one of its tens of thousands of mercenaries and their growing families) funded in order to maintain the drone-standard fiat USD as the de facto world reserve currency and force other nations, at the point of a gun, to continue to accept it as payment for REAL goods and services rendered.

Happy new year!

walter map

Dec 29, 2016 at 8:39 am

“The silver lining to the increasingly dark economic cloud is that there are only 361 shopping days left until the next celebration of Jesus Christ’s birthday”

I doubt the gods. It seems unbelievable that any self-respecting deity would allow himself to be so used and abused as a bloody marketing tool. Where’s the righteous wrath?

Maybe he’s just saving it up. Global economic collapse and catastrophic climate change could be the least of your worries.

d

Dec 27, 2016 at 5:40 pm

If the maneuvering in Italy to avoid the full force of the bail in regulations wasn’t so pathetic and predictable it would be funny fore everybody not just the people who predicted and observed it.

Edward E

Dec 27, 2016 at 7:54 pm

Everything is like heaven when the cooks are French,
the policemen are English,
the mechanics are German,
the lovers are Italian,
and the bankers are Swiss.

You know you went to hell when the cooks are English,
the policemen are German,
the mechanics are French,
the lovers are Swiss
and the bankers are Italian.

d

Dec 27, 2016 at 8:58 pm

√

Ricardo

Dec 27, 2016 at 9:03 pm

Ha ha. Well put Edward E.

Frederick

Dec 28, 2016 at 6:16 am

Im not sure Id classify Dragster as “Italian”More like globalist stooge in the same class ole Yellen

d

Dec 28, 2016 at 7:13 am

“Im not sure Id classify Dragster as “Italian” ”

Come on. He is a mobster, (That’s why he is called ” The Mafiosi” at the ECB) his blatant “extend and pretend” protection of the Italian and Club-Med banks. Is all about protecting the mob.

Hence the “Holiday Season” Bail-out of MDP, as opposed to the winding up of MDP, that way all the Mafiosi Fraud’s, stay under the rug. At least for a while longer.

Tom kauser

Dec 27, 2016 at 8:55 pm

Fees bribes and goodwill 3.8 billion or 8.8 billion and the money leaves regardless public or private next …..

Dan Romig

Dec 28, 2016 at 7:24 am

Two quotes here ring true.
“Just how immense the black hole inside of a bank really is …”
“If a bank is no longer “solvent,” it needs to be wound down, …”

Why can’t TPTB apply the second quote to the first? While it’s been 31 years since I got my Bachelor’s degree in physics, I do remember that with black holes, nothing that gets pulled into them can escape. Wind this damn thing down or be warned that all monies that get sucked into Monte dei Paschi’s black hole will not escape.

To Edward E, my next door neighbors got married this past June and enjoyed a three week honeymoon in Italy.

walter map

Dec 28, 2016 at 9:57 am

“Wind this damn thing down or be warned that all monies that get sucked into Monte dei Paschi’s black hole will not escape.”

That’s rather the point, now isn’t it? They don’t want to wind it down. It got into trouble in order to create a rationale for extracting wealth from the working class. Winding it down would defeat the whole purpose. That’s what bank bankruptcies are for.

Where did all that money go? Money flows uphill. It all went up the food chain. And now that it’s gone, they’re not about to bring it back down the food chain. They’re going to suck it out of the subject population and send that up the food chain too.

The gains have already been privatized. This is the socialize the losses stage.

Works every time. It’s worked for centuries. And hardly anybody ever catches on to the scam. At least, nobody who is going to do anything about it.

The UMich and the Conference Board consumer confidence models surged reporting that the illusion is complete and people believe the economy is improving. Case Shiller reports that housing prices have hit all time highs. ECB lowers Deutsche Banks capital requirements to that Deutsche Bank executives can receive bonuses, and much more.